What is Bankruptcy?
Bankruptcy is a legally binding debt solution which allows residents in England, Wales and Northern Ireland who are unable to repay their debts to write off everything they owe.
Bankruptcy is a formal debt relief solution in England, Wales and Northern Ireland that might be of benefit if you’re unable to pay back the unsecured debts you owe in a reasonable amount of time. It is usually considered to be a last resort and will have a serious impact on your credit rating.
The bankruptcy process involves the transfer of assets and property to a Supervisor who will manage the arrangement and liaise with creditors to cover the cost of repayments. Once you enter into bankruptcy your creditors will no longer be able to contact you or take further legal action to reclaim what you owe.
Bankruptcy itself typically lasts for one year, at the end of which any remaining debts are written off. However, you may also be required to make a monthly payment towards tour debts for up to three years, if you are deemed to have affordability from your income.
There are several ways in which you can find yourself being made bankrupt. You can apply for bankruptcy yourself – at the cost of £680 – or one or more of your creditors can petition to make you bankrupt. Applications in England and Wales are made to the Insolvency Service while in Northern Ireland these applications are handled by the High Court. Creditors can apply to have someone made bankrupt of they owe £5,000 or more.
Am I eligible for bankruptcy?
Opting for bankruptcy isn’t a decision that should be taken lightly and there are strict criteria for those interested. To be eligible for bankruptcy you must meet the below:
- Your unsecured debt is more than your assets
- You have little or no additional income but are unable to repay what you owe
- Your circumstances are unlikely to change
- You aren’t able to repay your debts as and when they fall due
Applying for Bankruptcy
Step 1: Get Advice
Here we shine a light on the five steps of the bankruptcy process:
Bankruptcy should always be considered as a last resort to financial impairment. As such, before beginning the process it’s important to speak to an expert money adviser who can explain all of the options available.
Step 2: Make your application
You can apply for bankruptcy online by filling out the application in your own time. This will then be reviewed by someone who works at the Insolvency Service called an ‘adjudicator’.
They’ll then decide if you should be made bankrupt. Bankruptcy also comes with a fee – in England and Wales this is £680 and in Northern Ireland it is £699. This fee can be paid in instalments, however, this must be complete before you can submit your petition.
Step 3: Accept and agree terms
If the adjudicator accepts your application and declares you bankrupt your bank and/or building society accounts will be frozen immediately and your case assigned to an ‘official receiver’.
They will decide, based on your affordability, whether you will be required to make monthly payment towards your debts and which of your assets should be sold. Control of our money and possessions will be passed to the receiver once the bankruptcy comes into effect.
Details of all bankruptcies are recorded on the public Insolvency Register.
Step 4: Cooperation
As you enter into your bankruptcy you will be interviewed by the official receiver. They will become responsible for realising any funds from your estate and distributing them to your creditors.
Once you have been declared bankrupt your creditors will no longer be able to pursue you directly for what you – all correspondence will go through the receiver. You will also be required to open a new bank account for wages and living expenses.
There are also strict restrictions in Bankruptcy. You will be unable to dispose of assets, obtain credit of more than £500 without permission and you cannot be a company director.
Step 5: Discharge
Providing you have cooperated with your receiver, you will be discharged from your bankruptcy after 12 months and your debts written off (subject to some exclusions).
It is suggested that you request a letter of discharge in case you need proof of this later. If you’ve been making monthly contributions towards your debt, you may be required to continue to make these for a further two years following your discharge.
Your bankruptcy will negatively impact your credit score and remain on your file for six years from the time it began.
Advantages of Bankruptcy
- Bankruptcy allows you to write off your debt in 12 months
- Creditors can no longer contact you directly for payment and must communicate through the official receiver
- You will be able to keep enough money to live on, as well as essential possessions required for basic domestic needs
- You can keep any items vital for trade work if you’re self employed
- If your home has little equity in it, you may be allowed to keep this
- If deemed essential for work, and worth £1,000 or less, you’ll be allowed to keep a vehicle
Disadvantages of Bankruptcy
- Bankruptcy will have a negative affect on your credit report and remain there for at least six years after you have been discharged.
- Your home will likely be sold if it there is more than £1,000 of equity.
- Vehicles over the cost of £1,000 may be sold, however, if a friend or relative pays the difference then it is possible to keep.
- Bankruptcy can affect your profession. You will be unable to work as a company director or be involved with the management of a limited company while you are bankrupt. It may also affect the ability to practice as a solicitor or accountant or in other financial services.
- There’s a cost attached to bankruptcy which many people cannot afford.
- It can affect a person’s ability to become a British Citizen and their status as a ‘person of independent means’
Frequently Asked Questions
Typically, bankruptcy lasts for 12 months from the date the court made you bankrupt; however, this can be extended if you don’t comply with the terms of your bankruptcy. Your circumstances may also require you to contribute monthly payments for up to two years after you are discharged.
If you fail to comply with the terms of a payment agreement, then a creditor can petition for bankruptcy. If you receive a call or letter informing you that a creditor intends to do this, you should seek professional advice straight away.
If you’re unable to repay your debts, you have the option of beginning bankruptcy proceedings. You can apply via an online application to an adjudicator.
Although you will unlikely be able to maintain an existing bank account after bankruptcy there are many banks that will provide a basic account service which allows you to deposit and withdraw cash. In some cases, if you have a joint account bankrupt and one of you as been declared bankrupt, the bank may insist on that account being closed and both of you opening a new account.
What happens to you home during bankruptcy is dependant on a number of different factors, including if your property has any equity in it. If the house is worth a considerable amount more than when you first purchased it, you may have to sell the house to release money for creditors but there are potentially other ways to realise the value which may not require an outright sale. You should seek expert advice on your own situation.
Although your assets must be sold to pay your bankruptcy debts, you are usually allowed to keep items you need for work such as tools or a vehicle (depending on the value of the vehicle, you may have to sell it for a cheaper model). You are entitled to keep personal items such as clothing, bedding and furniture. However, if you have valuable jewellery, antiques, art or motorbikes etc, these will be considered as assets which can be sold.
Bankruptcy has a serious effect on your credit rating as it stays on your credit file for six years. You may need to ensure that records of the main UK credit reference agencies are updated in due course to ensure that you can regain access to credit. Once you are discharged, and that the Bankruptcy is removed after six years, to ensure that you can gain access to credit in future. It can be difficult to secure a mortgage or other loan after a bankruptcy.
It depends on your job or profession and terms of employment. In many cases you can continue working as normal. However, there are certain employers and professions that place restrictions on the employment of people who are in bankruptcy. These include the legal and accounting professions as well as the police, armed forces and Members of Parliament.
Your name will be included on a register held by the Government Insolvency Service which is publicly available. However, only limited details are shown and someone would have to actively search for you by name to find any information. In the past, newspapers published details of bankruptcies, this is a rare occurrence now.
You should talk to your Trustee about your particular pension circumstances as the rules vary according to the kind of pension you have. Your state pension is not considered part of the bankruptcy estate, but it will be used as income when determining whether you should make monthly payments towards your bankruptcy. If you have a personal pension that has been approved by HM Revenue and Customs, it will not be included as an asset. Even if this is not the case, you may still be able to obtain permission for a personal pension to be excluded. However, if your pension is included as part of the bankruptcy estate, the Official Receiver or Trustee is able to claim all or part of it even after you have been discharged from bankruptcy.
There are several restrictions including the fact that you cannot borrow more than £500 without telling the lender you are bankrupt. You cannot be a director of a company or set up or manage a company without a court’s permission nor can you run a business under another name without telling people you trade with that you are bankrupt.
No, not all debt is written off. There are some exclusions including: debt arising from fraud; child support and alimony; student loans; court fines and personal injury fines.